New Mortgage Rules Make Documentation Biggest Challenge

Because credit unions already generally abide by new final qualified mortgage and ability-to-repay rules released Jan. 10 by the Consumer Financial Protection Bureau, the most difficult compliance burden will be to document the process, said John Bundy, compliance manager for CUNA Mutual.

“Credit unions may already have underwriting that looks like this, but now they’ll have to document it, and formalize those good practices so they can prove they’re in compliance,” he said.

However, he said the “added layer of bureaucracy” may make credit unions think twice about entering the mortgage business or increasing market share.

The CFPB’s final qualified mortgage rule essentially creates three types of mortgages. Qualified mortgages, which are provided a legal safe harbor, require both product and underwriting standards that mandate upfront points or fees be less than 3% of the total loan amount, and prohibit interest-only payments, negative amortizations and terms longer than 30 years. The borrower’s debt-to-income ratio may not exceed 43%, and lenders must verify and document income and determine that eight ability to repay standards are met.

Another qualified mortgage category created by the rule would only provide a legal “rebuttable presumption” and would apply to riskier loans that charge higher rates. However, the mortgages will still be required to meet the safe harbor requirements listed above.

The third category would be nonqualified mortgages, which could include some of the forbidden product qualities, such as negative amortization or interest-only payments, and wouldn’t be subject to underwriting requirements, such as the debt ratio limit. However, even these mortgages would be subject to the new ability to repay standards.

A proposed rule issued along with the final rules would create a fourth QM category that at first glance appeared to exempt most credit unions altogether. The rule would provide a qualified mortgage safe harbor to lenders with less than $2 billion in assets that originate fewer than 500 first mortgages per year.

However, upon further analysis, compliance experts said the proposed rule doesn’t provide much regulatory relief to credit unions after all.

Andrea Stritzke, vice president of regulatory compliance for the Des Moines, Iowa-based compliance firm PolicyWorks, said the proposed rule eases the 43% debt-to-income ratio requirement for qualified mortgages for small lenders. However, the lenders must keep the mortgage in their portfolio for at least three years to qualify and must also meet all other qualified mortgage product and underwriting standards.

“We’d rather have this proposed rule adopted rather than not at all, but [the CFPB] could have eased the burden on credit unions a lot more than in just that one piece,” Stritzke said.

Bundy said he thinks the rule might allow credit unions to offer new mortgage products that were previously restricted under current rules, such as closed-end home equity products. Most credit unions fall well within the 43% debt-to-income ratio for first mortgages, he said, but borrowers who own their homes outright and have enough equity to qualify for home equity lending are often older members on fixed or lower incomes.

Bundy added that the proposed rule and its increased flexibility to small lenders is a sign the bureau recognizes credit unions didn’t cause the financial crisis.

“But, it remains to be seen how much effect it will have on credit unions,” he said.

The rule included a footnote explaining the CFPB’s choice of $2 billion as a threshold for the proposed rule does not imply that it will use the mark to distinguish “small firms” for other purposes. Comments on the proposed rule are due to the CFPB by Feb. 25.

The CFPB also issued final rules Jan. 10 for high-cost mortgages, which are defined as riskier loans having annual percentage rates that exceed the average prime rate by 1.5 percentage points or more for first liens, or by 3.5 points or more for loans secured by a subordinate lien.

The new rules ban balloon payments, prepayment penalties, modification fees and limits late fees. Charging for providing a payoff statement and encouraging consumers to default on existing loans so they can refinance to a higher priced loan are also out.

The CFPB also issued a new rule that requires higher priced mortgages maintain escrow accounts for a minimum of five years, an increase from the current requirement of one year. Unlike the other rules, which don’t take effect until early 2014, the escrow rule goes into effect in June 2013.

Stritzke said most credit unions don’t offer higher priced mortgages because, among other things, they didn’t want to maintain an escrow program. However, when the CFPB finalizes rules this fall that could redefine what is included in annual percentage rate calculations, some fees credit unions charge could boost mortgages into the higher priced category and trigger the escrow requirement.

An exemption that excuses small lenders that serve rural or underserved areas from the higher priced rule could become more significant, she said, after the new APR rule is released.

The bureau also implemented a rule that requires lenders provide a list of homeownership counseling organizations to higher priced mortgage borrowers shortly after they apply for a mortgage.

Lauren Calhoun, compliance manager for CUNA Mutual, said the CFPB will create a database for lenders that will produce a list of counselors located near the borrower’s ZIP code that can be printed out and given to borrowers to comply. However, lenders are additionally tasked with ensuring the borrower attends a counseling session and collecting documentation in writing.

“The good news is, since credit unions don’t do a lot of these loans, very few would be required to do so,” Calhoun said of such borrowers.

A final interagency rule released Jan. 15 increases higher risk mortgage appraisal requirements. The rule, which includes the NCUA among other federal regulators, will require lenders who offer higher risk mortgages to use licensed or certified appraisers who must prepare written reports, based on physical inspections of a home’s interior, when they determine the value of a given home.

Mortgage lenders will also be required to provide homebuyers with a free copy of the appraisal. In an attempt to address fraudulent flipping, sellers who purchased the home for less than the current sale price within the last six month must also provide to the homebuyer additional documentation that details the difference in sale prices, any changes in market conditions and any improvements that have been made to the property since it was purchased by the current owner. Loans exempted from the rule include mortgages secured by manufactured homes, mobile homes, boats or trailers, construction loans and loans with maturities of 12 months or less if a bridge loan.

Other rules expected soon from the CFPB include regulations for loan servicing, and rules that will limit compensation to loan originators.